Case 2: KWIK LUBE

Fred Johnson, a successful textbook author and English professor at the University of Washington, retired from teaching in 1978 at age 40. His net worth was approximately a half-million dollars.

In 1985, during a trip to Los Angeles, he came across a very interesting type of new business. It was a very small gas station that specialized only in oil changes and lubrication jobs. The old gas station had been remodeled, the gas pumps had been removed, and the large sign above the small building read "OIL AND LUBE-- $10 and 10 MINUTES." For two hours, Fred observed the converted gas station from a restaurant across the street.

During the next month, Fred made three trips to Los Angeles to talk to the owner, George, about how he got into the business and how the business worked. Fred paid George $1,000 for his advice and information and promised never to compete directly with George or ever to open or operate a similar type of business in the Los Angeles area. After talking to his lawyer and accountant, Fred started to organize a new business--Kwik Lube. In March 1986, Fred had built his first Kwik Lube, and by the end of 1986, he had completed two additional Kwik Lubes in the Seattle area. The total gross revenues in 1986 from all three stations was $260,000.

Between 1986 and 1990, business picked up rapidly. Total gross sales in 1987 and 1988 were $680,000 and $750,000, respectively. In 1989, total gross sales for the three Kwik Lube stations were $750,000, and in 1990, total gross sales were $780,000. Fred was convinced that this sales increase was due to his not significantly increasing the price of his basic service, which was to change the oil, change the filter, and do a lube job. In 1986, the total price was $9.95. In 1989, the total price per job was $10.95, and by 1990, the total price was only $12.95.

In addition to running his three Kwik Lube stations in Seattle, Fred desired to franchise his idea in other cities in Washington and in other states such as Oregon, Idaho, and Montana. During the last three years, Fred had acquired considerable knowledge about this type of business. He was able to obtain the best possible prices for oil, lubricants, and filters. If he franchised Kwik Lube, he would even be able to make a profit from selling oil, filters, and lubricants. Fred invested over $20,000 in lawyers' fees and another $2,000 in talking to other companies in the franchise business. He decided to set his franchise fee at $18,000, plus 6% of the gross sales of the stations. In addition, each new Kwik Lube station had to conform to exacting standards for the building and all of the equipment. Depending on the location, Fred could build and equip a Kwik Lube Station for under $200,000. Like his own Kwik Lube stations, these new stations would have two car or vehicle bays. In 1991, Fred sold his first franchise to T. A. Williams and another franchise to an investor in Eugene, Oregon. By 1994, Fred had sold a total of eleven franchises in Spokane, Washington; Eugene, Oregon; Portland, Oregon; Butte, Montana; and Boise, Idaho. In addition, Fred experienced a substantial growth rate for total gross sales for his three Kwik Lube stations in Seattle. In 1991, total gross sales were $990,000. In 1992, total gross sales were $1,040,0000; in 1993, $1,200,000; and in 1994, $1,330,000.

Fred knew that it would only be a matter of time before someone else would start to compete directly with his Kwik Lube stations, but he never believed that the first competition would be in Seattle. Construction on the first two Speedy Lube Stations started in 1994, and both stations were in operation in early 1995. The two stores were almost identical to the Kwik Lube stations, but Speedy Lube was priced two dollars less than Kwik Lube's current price, which was now $19.95. Fred never dreamed that this new competition would cut so deeply into his total gross sales. Total gross sales for the three Kwik Lube stations in Seattle dropped to $1,110,000 for 1995, and the situation did not look any better for 1996. Indeed, when 1996 figures became available, sales were again only $1,110,000.

Soon after the total gross sales figures came in for 1995, Fred got some startling information from one of his friends in Spokane. Over 50% of the stock in Speedy Lube, Inc., was owned by Richland, Inc., a holding company owned by T.A. Williams. Fred was outraged that one of the people who purchased a franchise from him was directly competing with his Kwik Lube stores and in direct violation of the franchise contract, which contained a noncompetition clause.

Fred had only two goals for the coming year: (I) to shut down the two Speedy Lube stations, and (2) to regain his lost sales for the two years from T. A. Williams. Both objectives were to be accomplished with a lawsuit.

Fred Johnson's lawyer strongly suggested that Fred employ a witness to testify on his behalf against Speedy Lube. While there seemed to be no question about who would win the case, Fred's lawyer believed that an expert witness could more accurately determine the damage. In addition, most juries place more importance on expert testimony. As a result, Fred decided to employ the services of Dr. Warren Gunn.

Dr. Gunn was a professor of marketing at Eastern Washington University which was very close to Spokane. He had more than ten years' experience as an expert witness, and his specialty was determining damages for antitrust and franchise cases. His basic strategy was to find data about the same industry or a similar one in a location resembling the area in which the original problem occurred. In this case, Dr. Gunn needed data about the fast oil and lubrication business in a location similar to Seattle. Because Fred originally obtained his idea from a small station in Los Angeles and because Los Angeles had hundreds of these types of businesses by 1995, Dr. Gunn decided to collect data in the Los Angeles area. This would require the development and pilot testing of a questionnaire that could determine the total gross number of cars serviced for fast oil and lubrication businesses in the Los Angeles area between 1986 and 1996. Although the questionnaire study would cost $20,000 to perform, Dr. Gunn and Fred both believed that it was the best approach. The data were collected in two weeks, and are summarized in Table 1. Both Dr. Gunn and Fred knew that if the results of the questionnaire were not favorable, they would not use it during the case.

TABLE 1 Analysis of Average Fast Oil and Lubrication Total Gross Sales for Cars Serviced at Los Angeles Stations (Using Two Bays as a Basis for Comparison)

YEAR	AVERAGE TOTAL SALES
1986	$190,000
1987	220,000
1988	250,000
1989	240,000
1990	260,000
1991	330,000
1992	350,000
1993	390,000
1994	440,000
1995	470,000
1996	520,000

DISCUSSION QUESTIONS

1. Using the data in the table, compute the loss for Kwik Lube stations during the last two years using regression.

2. Was it worth $20,000 to perform the marketing research?

3. Estimate the total loss in gross sales for Fred's Kwik Lube stations over the two-year period. How accurate can the results claim to be?

4. What other factors might be introduced into the lawsuit?